PNC Financial Services Group
Covering Analyst: Matthew Miller Email: Miller24@uoregon.edu
Business Overview
› Founded in 1852 as The Pittsburgh Savings and Trust
Company
› One of the largest diversified providers of financial
services in the U.S.
› Strong loan and customer growth in 2012
PNC is Growing
Percentage Growth
2012
2011
2010
Retail Checking Relationships
12.39%
5.42%
1.39%
Corporate Banking Total Loans
27.66% 15.26%
-3.79%
4.63% -3.07%
-5.47%
Asset Management Group Total Loans
Residential Mortgage Loan Originations 33.33%
8.57% -45.03%
Improving Credit Metrics
Credit Metrics
2012
2011
2010
PLL/Loans
0.53%
0.72%
1.66%
Non-Accruing/Loans
1.75%
2.24%
2.97%
Charge-Offs/Loans
0.69%
1.03%
1.95%
Loans/DD+TD
87.20%
84.60%
82.12%
Loans/Assets
60.92%
58.63%
56.98%
Asset Quality
Loan Ratios
Scope
› 2,881 Branches
› 7,282 ATM Machines
› 18 States, Washington D.C.
Geographic Scope of Operations
Revenue Breakdown
Revenue By Segement
BlackRock & Other
13%
Residential Mortgage
3%
Asset Management
6%
Corporate & Institutional
37%
Retail
41%
Revenue Breakdown
Revenue by Source
Non Interest Income, 37.9%
Interest Income, 62.1%
Financial Services Industry
› Consolidating
› Changing regulatory environment
› Sustained low interest rates
› Projected 5.2% growth 2012-2017
Industry Statistics ($ in billions)
Industry
PNC Share
Total Assets
$13,070.00 $300.80 2.30%
Total Loans
$6,901.00 $177.80 2.58%
Bank Net Income
$34.72
$0.92 2.65%
Avg ROA
1.07
1.04
Avg ROE
9.46
8.22
Avg NI Margin
3.44
3.71
Consolidation
Commercial Banks by Year
8,000
7,500
7,000
6,500
7770
7631
7526
7401
7284
6,000
7088
6840
6530
6291
5,500
6006
5,000
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Regulatory Environment
› Basel III
– Draft regulation published
› Implementation
– Began 1 January 2013
– End 1 January 2019
Low Interest Rates
› Current prime rate is 3.25
› Expected to remain low
– Shrinking net interest
margin
Prime Rate
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Comparable Analysis
› Growth, risk, and products and services
–
–
–
–
–
U.S. Bancorp 22.5%
CIBC 22.5%
J.P. Morgan 20%
Toronto Dominion Bank 20%
Wells Fargo 15%
Comparable Valuation
Multiple
P/B
P/TB
P/Loans
P/E
Price Target
Current Price
Undervalued
Implied Price
Weight
108.70
10.00%
102.07
10.00%
76.46
40.00%
66.04
40.00%
$78.08
62.39
25.14%
Excess Return Model
› Values only the equity
– No WACC
– No Working Capital
› Reasons for not doing a DCF
– Interest
– Debt
– Working Capital
Excess Return Model
Net Income Available to Commone Shareholders
% Growth
$2,003 $3,011 $2,998 $2,832 $3,473
50.32% -0.43% -5.54% 22.62%
Equity Cost
3,572
Excess Equity Return
-99
Cumulated Cost of Equity
Present Value
Beginning BV of Equity
39003
Cost of Equity
8.88%
Equity Cost
Ending BV of Equity
3572
39003
42380
Net Income
$3,473
Dividined Payout Ratio
2.75%
Dividends Paid
Retained Earnings
$95
3377
Excess Return Model Assumptions
Excess Return Model Assumptions
Tax Rate
Risk Free Rate
Beta
Market Risk Premium
24.50% Terminal Growth Rate
2.01% Terminal Value
1.21 PV of Terminal Value
5.67% Sum of PV Free Cash Flows
% Equity
11.37% Excess Equity Value
% Debt
88.63% Total Liabilities
3.00%
2,685
1,612
80
1,692
263,342
Terminal RFR
3.18% Current Book Value
39,003
CAPM
8.88% Market Capitalization
40,695
Terminal CAPM
10.06% Fully Diluted Shares
529
Implied Price
76.94
Current Price
63.87
Undervalued
20.47%
Final Valuation
Method
Implied Price Weight
Excess Return
$76.94 50.00%
Comparables
$78.08 50.00%
Price Target
$77.51
Current Price
$62.39
Undervalued
24.23%
Questions?
Recommendation
› Based on my analysis I have found PNC to be significantly
undervalued. Therefore I am recommending a buy for all
portfolios
Appendix 1: Payout Ratio
Payout Ratio
110.00%
90.00%
70.00%
Share Repurchases
Dividends
50.00%
30.00%
10.00%
-10.00%
2006
2007
2008
2009
2010
2011
2012
Appendix 2: Dividend Yield
Dividend Yield
4.0%
3.5%
3.0%
2.5%
Dividend Yield
2.0%
1.5%
1.0%
0.5%
0.0%
2006
2007
2008
2009
2010
2011
2012
Appendix 3: Projected Dividend
Projected Dividend Yield
5.00%
4.50%
4.00%
3.50%
3.00%
2.50%
Dividend Yield
2.00%
1.50%
1.00%
0.50%
0.00%
2013
2014
2015
2016
2017
2018